B10 – Want to start a company? Try this 4 Step Dance

Recently, I spent a salad filled evening before my next event discussing with a budding entrepreneur what to do if you “have an idea” but have no idea where to start.

So, where do you start?

If you were building a walk-in closet with motion-sensored lights like I did in my college fraternity house, I’d say measure twice, cut once.  I half assed the measurement and just decided to “go conservative” and subtract a 1/4″ from the floor and shelving measurements so it would all fit.

It did fit.  And it was about 1/4″ too short all around, so I had to buy some runner carpet to cover the missing edge and use a different type of bracket for the shelving.

Overage: 3 hours extra work and $47.61 extra…that’s a lot of Wendy’s Triple Cheese Burgers and Frosties back in the day.

The same approach applies to startups, the fancy terminology is “Customer Development Model” instead of “Product Development Model.”  Steve Blank in Four Steps to Epiphany captures the step by step approach beautifully.  It’s also a fundamental book behind another startup buzzword strategy, the “Lean Startup.”

It was given to me by a friend with a funded startup, and I want to share it with you now. Go buy it, it’s absolutely worth it.  In the meantime, here’s some teaser information to get you going.

Short Version: ID your customer base and build around them versus building a product and then trying to find customers who would fit.  Grow slowly and spend little on sales until really ready.

Measure Twice, Build Once

Which in Startup World Means:

Hypothesize, Act, Measure, Revise

General Overview

  • Products developed with senior management out in front of the product wins
  • If send a sales/marketing team that’s only been tangentially involved in product development you will lose
  • Go out and research potential customer’s needs and wants before being committed to a path
  • Treat business like a science project: hypothesis, act, measure, revise

Step 1: Customer Discovery

  • Have we identified a problem customers want solved?
  • Does our product solve these needs?
  • Do we have a viable and profitable business model?
  • Have we learned enough to go out and sell?
  • Customer discovery philosophy
    • Learn, adjust, and test if your product has a market
    • Create the minimum number of features needed for market, not a MRD (marketing requirements document – what marketing wants it to have)
    • You can’t afford time to add all the ideal features without even testing it
    • “Earlyvangelists” will use it, provide feedback, and be actively involved developing it out anyways under-featured
  • Earlyvangelists
    • They have a problem
    • They are aware they they have the problem
    • They are actively looking for a solution
    • They have already put together existing pieces for a solution (but it’s not the best)
    • They have or can acquire a budget to pay for your solution
  • Start building from the vision and go from there based on the results of the testing
  • Make sure everyone in your company is on board with the whole process
    • State hypotheses: assumptions on paper you will be testing
    • Test problem hypotheses: find customers and listen to what they have to say
    • Test product concept: solve “mission critical” and “have to have” product features (not just any/all features proposed)
    • Verify that price and distribution channels are profitable for you
  • Create a customer development team (not a sales & marketing team)
    • Include the technical co-founder who goes out and talks to the customers
    • It may include a “sales closer”
    • It must have authority to radically change company’s direction based on feedback
    • The team must be able to listen, empathize with customers, embrace change, move between product and customer development teams
    • Communication throughout company is key
  • Create a product execution team: team who actually creates the product
    • Also consider: Customer execution and vision team AND Product execution and vision team
  • Phase 0: Buy-in
    • At least enough funding for 2 or 3 passes through this process
    • Product development is spent at least 15% of the time out talking with customers
    • Create mission statement of company and team: 2 paragraphs referred to for mission-oriented leadership and core values
  • Phase 1: Hypothesis
    • Product: the features, benefits, IP, dependency analysis, delivery schedule, and total cost of ownership
    • Customer and problems
      • Types: latent problems, active problems, and potential future problems
      • Day in life (all people involved)
      • Organization map and influence chart
      • ROI: for user
      • Minimum features set
    • Channel and pricing
      • What is the price and complexity of the pricing?
      • Are they established customers already?
      • What is the lifetime value of customers?
      • Would they buy it if free? What if it cost $1 million?
    • Demand creation
      • How do you create demand? Which direction do you go?
      • What will influence the demand?
    • Market types
      • Can defer this decision until later
      • Existing market: create competitive diagram and find white space
      • New market: create market map
      • Resegement: do both steps above
    • Competition
      • What are the attributes of the product?
      • Don’t compare yourself to other startups
    • What are your types of customers: users, influencers, recommenders, economic buyers, decision makers, saboteurs
  • Phase 2: Test and Qualify: Own Assumptions About the Customer
    • First customer contacts: get referred to 50 individuals to get 10 of them to test it
      • Try to get a referral and have a reference story
    • Customer problem presentation
      • Have them list problems that you could just wave a “magic wand” and fix
      • What is the current solution to that problem?
      • What is your company’s solution?
      • Don’t convince/sell them your product, listen
    • In-depth customer understanding
      • Will they pay for it?
      • How do they find things/products?
    • Market knowledge
      • Find adjacent companies
      • Industry analysts
      • Offer value (what you’re doing)
      • Trade shows: get their literature and see their demos
  • Phase 3: Test and Qualify Product
    • Meet with product development team for reality check
      • Share what learned from customer feedback
      • Create new features list
      • All features past the first version are up for grabs, open to change
    • Create product presentation
      • New slides based on feedback
      • Solution oriented story telling
    • More customer visits
      • Target appropriate titles/roles
      • Demo/prototype in meeting
      • Understand the distributor landscape
    • Product development 2nd reality check
      • First to market vs. fastest to market
        • First to market is a fallacy
      • ID 1st board of advisory  members
        • Consider bringing on some of the customers who are most active
  • Phase 4: Verify
    • Problem: Are you confident you have identified the problem?
    • Product: Do the top 3 features match the top 5 problems?
    • Business model: Rerun the numbers and have updated sales and revenue plan
    • Iterate if not entirely confide (or exit if a bad idea now): pause…are we sure we are ready to move to the next step?

 

Step 2: Customer Validation

  • Do we understand the sales process?
  • Is the sales process repeatable?
  • Can you prove it with orders?
  • Have we correctly positioned the product and company?
  • Do we have a workable sales and distribution channel?
  • Are we confident we can scale the company?
  • Before expanding the company
    • Develop predictable sales process and validate the business model
    • Prove it works before starting a high burn rate at which point you don’t have the leeway to learn, you have to start executing
  • If you give user product today for free, are they prepared to install and use it across their company and department?
    • Would they pay $1M for it?
    • Customers might think something is interesting, but wouldn’t pay for it
      • can you monetize other ways?
  • You should care less about selling the product, focus more on finding a repeatable sales model/process
    • Identify the influencers, decision makers, buyers, budget cycles, etc.
  • Customer validation team: should not be a VP of sales, but founders and CEO

 

Step 3: Customer Creation

  • Wait to spend lots of money in a new market
    • All about education and technology adoption
    • Marketing steps do help customers learn about product and creates a desire to buy
  • Marketing depends on market type
    • If dominant leader has 74% market share, you must spend 3x their marketing budget
    • If dominant leader has 26% market share, you must spend 1.7x their marketing budget
  • Building blocks
    • Create year 1 objectives
    • Create product and company objectives
    • Launch product and company
    • Foster the demand creation
  • Set concrete goals for sales
  • Don’t spend a lot of money on ads too early
  • Marketing is not just 1 department’s responsibility, it is all of them
  • Phase 1: Get Ready to Launch
    • Make a market type questionnaire, chose market type, agree on Y1 customer creation and sales objectives
    • Existing market: challenge is you risk not penetrating
      • Take as much of the market as you can: war
    • New market: challenge is lack of education
      • Grow adoption of this new market: nurture
    • Resegmenting the market: hybrid approach
    • Forecast how much you would sell:
      • If there was no competition
      • There are competitors
      • Work backwards until see how many leads you need, how many sales people needed
        • Remember you will be incurring one-time launch costs
    • First mover challenge is a fallacy: first movers have a 47% failure rate
      • It’s about understanding the type of market and customers that are in that market
  • Phase 2: Positioning
    • Choose a PR agency who can refine your position and can connect to customers and the different market types
      • Now with social media, consider objectives and skill set of these firms
    • Internal/external position audits
      • Company does minimum first 5 before PR agency
      • Audit to see how your company and product is viewed
    • Match positioning to marketing type
      • What does company do for customers and why do they care?
        • Resegment: you find a niche or are able to provide lower cost
        • Existing market: you are different and credible
        • New market: you have a vision and passion
  • Phase 3: launch
    • Launch is based on the market type you are in
      • Existing market: launch is an onslaught—most expensive
      • New market: you are establishing mind share –it is the cheapest
      • Resegment: niche—cost depends
    • Customer/audience selection
      • Whomever chooses to buy
    • Messengers who will amplify your reach
      • Experts, evangelists who want to pay for the product, and connectors
    • Craft the message
      • Make it sticky
      • Identify the pain it alleviates
      • Establish why they should they care
    • Understand message’s context: macroeconomic and current events
    • Know which media to use for the type of content you are pushing
    • Measure success
      • Compare company/brand audits before and after launch
  • Phase 4: Create Demand
    • Strategy aligned with goals (based on market type)
    • Agree on measurements (embrace mistakes and work backwards)
    • Iterate (now you’re ready)

 

Step 4: Company Building

  • Long term success: try to keep founders there longer than you normally would
  • There’s a middle step between startup and bureaucracy, middle step is “mission-oriented” leadership
  • Build mainstream customer base beyond earlyvangelists
    • Strategy depends on market type and chasm (adoption of your new technology)
  • Build to support greater scale
    • Current employees have to adopt mission-centric leadership or leave at this point
  • Create fast response departments
    • Build them around OODA: observe, orient, decide, and act
  • Phase 1: Cross Chasm and Create New Revenue/Sales Projections
    • For a new market: find the niche and create tipping point strategies
      • Don’t try branding and positioning at this point, its useless
    • For an existing market: positioning is key, then go into branding
    • For resegmenting market: same as existing, and much more money is required than you might expect
  • Phase 2: Mission-Centric Management
    • Company changes from discovery and learning to focus on getting to mainstream customer
      • Shift in employee needs from a 24/7 type of person to a 9-5er
      • Shift in vision from opportunistic vision to process oriented
    • Make mission part of life: by answering these questions
      • Why do you come to work?
      • What do you need to do to succeed?
      • How do you know you’ve succeeded?
      • What are the revenue and profit goals?
      • Can new hires read and understand where the company and mission is coming from?
      • Goals should reflect market type
        • Resegmented market should focus on branding and positioning
        • New market on hockey stick growth
        • Existing on straight line growth
  • Phase 3: Create Departments
    • Each department creates its own mission statement
      • Founders create the first iteration before hiring people in these departments to ensure new hirers are unified with the mission
    • Define departmental roles based on market type
      • Existing Market
        • Sales: steady repeated sales, incentivized for closing and hire no “wild cards”
        • Marketing: find qualified customer leads, competitive analysis, and emphasize sales training
        • Business Development: Partner with another product to provide a “whole product” that your company might not be able or has yet to create
      • New Market
        • Sales: find the beachhead and earlyvangelists
        • Marketing: Identify chasm crossing strategy
        • Business Development: Form alliances for whole product
      • Resegmented Market
        • Sales: sell to existing customers and find new customers
        • Marketing: differentiate to get new leads
        • Business Development: partnerships for whole product
  • Phase 4: Fast Response Departments (Necessary Against Competitors and Ensure Positive Cash Flows)

    • Decentralized decision making
      • Counter the uncertainty of decentralized decision making with speed and agility
      • Mission intention: acted in the best interest of a long lasting relationship even after task accomplished
      • Employee initiative: rewarded as long as what did was mission focused and communicated to leaders
      • Mutual trust and communication between managers and employees is earned and given
      • “Good enough” decision making and plans
        • Make meetings that are also on point and don’t deviate
      • Mission synchronization
        • All departments need to know the corporate mission
        • All departments are supported by one another
        • CEO approves and knows of all departments missions
      • OODA: Observe, orient, decide, and act
        • Executives continue to get 1st hand knowledge: go out and see for self
        • Overall view: each department has someone gather and send updates
        • Competitor’s view: chess match from their perspective
        • Key is to disseminate information, especially bad news which tends to not be spread
      • Don’t just preach freedom, but actually give it
      • Allow superstars to coach, be idols, whatever they want
        • True test is to see if you can keep them at the company once things get formalized
      • Iterate and grow: mainstream customers are hardest to get right